Capital Gains Tax

Question 1

Define chargeable person.

Answer 1

Chargeable person is any of the following:

1) Individuals (whether in personal capacity or as a sole trader);
2) Personal representatives when disposing of assets of the deceased;
3) Partners, when partners dispose of chargeable assets (each partner charged separately for their own proportion); and
4) Trustees on the disposal of a chargeable asset from a trust fund.

Question 1

What is capital gains tax and who is it paid by?

Answer 1

Payable on chargeable gains made by a chargeable person on the disposal of chargeable assets in a tax year.

Tax year runs from 6th April one year to 5th April following year.

Question 1

Do companies pay capital gains tax?

Answer 1

No. They pay corporation tax.

Question 2

What is a chargeable asset (under the TCGA 1992)?

Answer 2

All forms of property (including debts, options and incorporeal property). It does not include sterling so the disposal of cash in sterling is not subject to CGT.

Question 3

Define incorporeal property.

Answer 3

A legal right in property which has no physical existence, eg patent or a lease.

Question 4

Explain step 2 of calculating CGT: calculation of the gain.

Answer 4

Consideration received for the asset less cost of the asset (ie asset’s sale price less its purchase price.

Some deductions will be available which may reduce the gain further.

Question 4

List the steps to calculate CGT.

Answer 4

1) Is there a disposal of a chargeable asset;

2) Calculate the gain;

3) Consider reliefs;

4) Aggregate gains/ losses and deduct any annual exemptions

5) Apply the correct rate of tax.

Question 5

Explain step 3 of calculating CGT: consider reliefs.

Answer 5

There are various reliefs which are available which will need to be applied.

Question 6

Explain step 5: apply the correct rate of tax.

Answer 6

Following rates apply to any gains other than residential property or gains which do not qualify for business asset disposal relief:

1) If taxpayer’s taxable income isless than basic rate threshold (£37,700), rate of tax payable on gains is 10%;

2) if taxpayers taxable income exceeds basic rate threshold, rate of tax payable on gains is 20%.

Question 7

Explain step 4 of calculating CGT: Aggregate gains/ losses and deduction of annual exemption.

Answer 7

Gains and losses from all sources are added together.

Annual exemption of 6,000 is deducted at this stage.

The annual exemption is the capital gain every CGT payer can make each year without being taxed. Current exemption is £6,000.

Question 8

How is the rate of tax calculated where the gains are made up of some assets which qualify for business asset disposal relief, and some which do not?

Answer 8

Business asset disposal relief gains are added to their income first, meaning that the other gains will be treated as the top slice of their income (ie are more likely to exceed the higher rate threshold).

Question 8

Explain the rate of tax payable for capital gains on residential property.

Answer 8

If chargeable asset is residential property (which is not taxpayer’s main residence) gains are subject to surcharge of 8%.

This means any gains below basic rate threshold are taxed at 18%, and gains over the basic rate threshold are 28%.

Effectively an 8% surcharge is added onto the standard CGT rates.

Question 8

Explain gains made on assets which qualify for business asset disposal relief.

Answer 8

Taxed at 10% regardless of the taxpayer’s income.

Question 9

What is the rate of CGT payable by trustees and PRs?

Answer 9

20% (or 28% for residential property).

Question 10

How is the basis (ie the amount the asset was bought for) calculated where the asset was received as a gift?

Answer 10

It will be calculated by HMRC based on its market value at the time of the gift.

Say they bought a watch for 100k and then gifted it. the market value at the time of the gift (eg 300k) would mean the 200k is a capital gain and therefore taxable.

Question 11

Is CGT still applicable where the taxpayer only sells or gives away part of an asset?

Answer 11

Yes.

Question 12

Explain the situation where someone dies.

Answer 12

There is no disposal, so therefore no CGT is payable.

The PRs however are deemed to acquire the asset at market value at the date of death. This is known as the probate value.

This is not subject to CGT however it will potentially be subject to IHT.

Question 13

How is the gain of a chargeable asset calculated?

Answer 13

The following things are subtracted from the consideration for the sale:

1) Initial expenditure:

2) Subsequent expenditure:

3) Incidental costs of disposal.

Question 14

List what counts as initial expenditure.

Answer 14

• Cost price of asset (or market value if gifted or probate value if taxpayer inherited it);
• Incidental costs of acquisition (eg conveyancing fees, legal fees, valuation feed and stamp duty); and
• Expenditure wholly and exnlucsivley incurred in providing the asset (eg cost of building the property).

Question 15

List what counts as subsequent expenditure.

Answer 15

• Expenditure wholly and exclusively incurred in establishing preserving or defending title to the asset. Eg legal fees to resolve a dispute regarding title to a property.
• Expenditure wholly and exclusively incurred to enhance value of the asset (which is reflected in the value of the asset at time of the disposal. Eg cost of building an extension to the house.

Question 16

Is the cost of normal maintenance, insurance and repairs deductible as subsequent expenditure?

Answer 16

No.

Question 17

What constitutes incidental costs of disposal (and I therefore deductible)?

Answer 17

Legal fees for the sale and other profession fees (eg estate agent’s fees).

Question 18

What is an indexation allowance?

Answer 18

An allowance to account for inflationary gains within the total capital gain amount.

This allowance is only relevant where charge to tax was deferred by using rollover or gold-over reliefs before April 2008

The relief of this allowance is only available where the asset was owned at some point between 31st March 1982 and 5th April 1998.

Question 19

Explain relief on replacement business assets (rollover relief).

Answer 19

Enables sole traders to and partners to sell certain assets (qualifying business assets.) without paying CGT, provided the proceeds of sale are invested in other qualifying business assets.

Seller will have to pay tax eventually, but CGT charge is postpones until seller dispose of new assets.

Question 20

What are qualifying business assets for rollover relief?

Answer 20

Main qualifying business assets for purposes of rollover relief are: land buildings and goodwill.

Asset must be used in the trade of the business rather than being held as an investment. Fixed plant and machinery are qualifying business assets.

Question 21

Are shares qualifying business assets for the purposes of rollover relief?

Answer 21

No.

Question 22

When does the rollover relief apply?

Answer 22

Applies when qualifying asset is disposed of, and the asset is owned by:

1) a sole trader who uses the asset in their trade;

2) a partnership which uses the asteroid in their trade;

3) an individual partner, where partnership uses the asset in the partnership trade; or

4) an individual shareholder, where asset is used in the trade of the company, in which the shareholder owns shares. for this to apply, company must be the shareholder’s personal company, meaning they must own at least 5% of the voting shares in the company.

Provided both the asset disposed of and asset acquired fall within the definition of qualifying asset, rollover relief will apply. the assets do not have to be the same type of asset (eg goodwill could be sold and a property could be bought).

Question 23

Is there a tie limit on rollover relief?

Answer 23

Yes.

taxpayer must acquire the replacement asset within one year before, or three years after, disposal of the original asset.

HMRC can extend the time period.

Question 24

How is rollover relief applied?

Answer 24

Taxpayer must claim relief within 4 years from end of the tax year in which they acquire the replacement asset (or if later, within 4 years from end of tax year in which the original asset is sold).

Gain is deducted from acquisition cost of the replacement asset. This is then the value which will be subject to CGT in the future, as the eventual disposal value of the ‘new’ asset will be less the adjusted CGT amount calculated when the rollover relief applied.

Question 25

Does the annual exemption amount of £6,000 apply where rollover relief has been used?

Answer 25

No.

Question 26

Give the conditions for rollover relelif on incorporation of a business to apply.

Answer 26

• Business must be transferred as going concern, so after disposal it must be carried on as the same business but with a different owner.
• Consideration must be in shares issued by the company (not cash). If only part of the consideration was shares (eg 25%) then only that percentage of the gain can be rolled over.
• Business must be transferred with all of its assets (aside from cash). If any assets are retained by the taxpayer, then relief does not apply.

Question 26

Explain rollover relief on incorporation of a business.

Answer 26

The charge to the CGT is postponed (same as rollover relief).

It applies, subject to conditions, where individual sells their interest in an unincorporated business (ie sole trader, partnership) , to a company.

Question 26

How is the rollover relief (on incorporation of a business) applied?

Answer 26

• Gain is rolled over by notionally deducting it from cost of the acquisition of the new shares.
• No application to HMRC is needed as it is automatically applied unless the taxpayer chooses not to use it.
• Annual exemption cannot apply where rollover relief on incorporation of a business is used.

Question 27

Explain hold over relief on gifts.

Answer 27

Allows individual to make gift (or sale at undervalue) of certain types of business assets, without paying CGT. If donee dispose of the asset, donee will be charged to tac on their own gain and the donors gain.

Question 28

Explain the conditions for hold over relief on gifts.

Answer 28

1) Only available to gifts (or sale of the assets at an undervalue).

2) Only part of gain relating to chargeable business assets qualify for the relief.

3) If the donee is a company, relief does not apply to a gift of shares.

4) Both donor and donee must elect to apply for the relief, as donee is accepting liability for any CGT payable in relation to the gift when they eventually dispose of the asset.

5) Donor and donee must both elect for relief ti apply within 4 years from the end of the tax year of the gift.

Question 29

What qualifies as a business asset in relation to hold-over relief?

Answer 29

1) Asset’s used in donor’s trade (or their interest in such assets if donor is sole trader, or partner whose assets are used by the partnership).

2) Shares in trading company (not listed on recognised stock exchange). AIM is not deemed to be a stock exchange for these purposes.

3) Shares in a personal trading company, even if company is listed on recognised stock exchange. A personal company is one in which the donor won at least 5% of voting shares.

4) Assets owned by the shareholder and used in their personal trading company.

Question 30

How is hold-over relief applied?

Answer 30

• Chargeable gain is calculated by taking market value as consideration for the disposal.
• Deemed gain is then deducted from market value of the asset to produce the acquisition cost for the donee.
• When donee then later disposes of the asset, notional acquisition cost and any qualifying expenditure are deducted from sale price (or market value if it is a gift) to find donee’s gain.
• Once donee’s chargeable gain has been calculated, reliefs should be considered as usual.

Question 31

What are the CGT implications of a donee dying where they have benefited from how-over relief?

Answer 31

If they die before despoil of the asst, the gains escape CGT altogether.

Question 32

What is business asset disposal relief?

Answer 32

• Available on gains made by individuals on dispel (ie sale or gift) of certain assets.
• If business asset disposal relief applies, rate of tax will be reduced to flat rate of 10%.

Question 33

What must there be for business disposal relief to apply?

Answer 33

There must be a qualifying business disposal for the relief to apply.

Question 34

How does the business asset disposal relief apply to sole traders/ partnerships?

Answer 34

When sole trader/ individual partner disposes of whole or part of a business, BADR may apply.

This includes the following:

1) Business, or part of it is disposed of as a going concern; or

2) Assets are disposed of following cessation of the business (provided assets were used in the business at the time of the cessation of business).

Question 35

Define ‘qualifying disposal of part or the whole of a business’ (for the purposes of BADR).

Answer 35

The interest in the business as a whole, not just one or more assets, must have been owned either:

1) Throughout the period of two years ending with the date of disposal; or

2) Through the period of two years ending with the cessation of the business, provided that the disposal is within 3 years after cessation of business.

Only assets used for there purposes of the business carried on by the individual or partnership are eligible for relief.

Question 36

Are company shares, securities and other assets held as investments eligible for BADR, where held by a partner or sole trader?

Answer 36

No.

Question 37

Explain when a disposal of company shares will apply for BADR.

Answer 37

1) Company is a trading company;

2) Company is the disposer’s personal company (taxpayer must hold at least 5% of the ordinary share capital in the company, which gives them at least 5% of the voting rights in the company), and either or both of the following are met:

a) disposer must be beneficially entitled to at least 5% of the profits available for distribution to equity holders and at least 5% of the assets available on a winding up;
b) disposer would be beneficially entitled to at least 5% of the proceeds of sale if the whole of the ordinary share capital of the company were disposed of; and

3) Disposer is an employee or officer of the company.

Question 38

What are wasting assets?

Answer 38

Assets with a predictable life of less than 50 years.

This includes most consumer goods, eg kitchen appliances.

Question 39

When are wasting assets exempt from CGT?

Answer 39

Assets are exempt from CGT if consideration for the disposal is £6,000 or less.

Question 40

Are damages received from PI claims exempt from CGT?

Answer 40

Yes.

Question 40

Explain how gains and losses are aggregated.

Answer 40

Gains and losses from all sources must be added together.

Annual exemption is deducted from total gain at this stage.

This a general deduction from taxpayer’s total net gain, but taxpayer can choose to apply annual exemption first to the gains that attract the higher rates. This is useful if they have grains on more than one disposal which are subject to CGT.

Question 40

How do the reliefs and annual exemptions operate together?

Answer 40

If more than one relief applies, taxpayer may have to choose which relief to use.

Question 41

True or False: Business asset disposal relief cannot apply to any gains which are to be rolled over on the replacement of qualifying assets or held over on the gift of business assets.

Answer 41

True.

Question 42

Can the annual exemption be applied to any gains rolled over or held over?

Answer 42

No.

Question 43

Can rollover relief on the replacement if qualifying assets be used in conjunction with hold-over relief/ rollover relief on incorporation?

Answer 43

No.

Question 44

If rollover relief on incorporation applies to a transfer of a business, can BADR or the annual exemption be used?

Answer 44

No.

Question 45

Can the annual exemption be used to reduce gains before applying BADR?

Answer 45

Yes.

Question 46

What are the three categories of chargeable asset?

Answer 46

1) Assets which are not residential property and do not qualify for BADR. these are taxed at 10% or 20% deplaning on the income.

2) Assets which qualify for BADR, which are taxed at a flat rate of 10%; and

3) Residential property, attracting surcharge of 8% on normal rates of 10% and 20%.

Assets in these different categories should be calculated separately so the correct rate can be applied to each.

Question 47

What should losses and annual exemption be deducted from?

Answer 47

The gains that would otherwise be subjected to a higher tax rate.

Makes sense to deduct them from residential property gains first, then gains on assets which do not qualify for BADR, and then on assets which do qualify for BADR.

Question 48

Is a disposal to a spouse subject to CGT?

Answer 48

No however when it is then disposed of by the recipient, CGT becomes payable.

They must be living together in order to rely on this.

Question 49

Summarise the CGT calculation steps.

Answer 49

Step 1: Identify the disposal (sale or gift) of a chargeable asset (part disposals are
apportioned);

Step 2: Calculate the gain – deduct costs of disposal, initial and subsequent expenditure and incidental costs of disposal.

Step 3: Consider reliefs. The main ones are:
* Relief on replacement of business assets (‘rollover’ relief)
* Rollover relief on incorporation of a business
* Hold- over relief on gifts
* Business asset disposal relief

Step 4: Aggregate gains/ losses and deduct the annual exemption (deduct the annual
exemption from the gains which would be subject to the highest rate of tax). Capital losses carried over from the previous year can be deducted here.

Step 5: Apply the correct rate of tax:
* Standard rate of 10% for basic rate taxpayers and 20% for any gains above the basic
rate threshold;
* Residential property rate – apply a surcharge of 8%, meaning that the rates are
18% for basic rate taxpayers and 28% for any gains above the basic rate threshold; or
* Business asset disposal relief rate of 10%, whatever the taxpayer’s income.